Articles and news about FHA loans and HUD requirements. FHA loans are great for first-time homebuyers.

Monthly Archives: May 2013

FHA Loan Application Rules

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When some FHA mortgage loan applicants fill out their loan paperwork, it may be tempting to leave recent or new financial obligations out of that paperwork. In some cases it may be a simple oversight, in others it might be a question of an applicant mistakenly thinking that the lender won’t know or can’t find out.

What’s the reality?

FHA loan rules anticipate situations like these. In HUD 4155.1, Chapter Four, Section C, there’s a heading titled, “Recent and/or Undisclosed Debts or Inquiries”. It states:

“Lenders must determine the purpose of any recent debts, as the borrower may have incurred the indebtedness to obtain the required cash investment.”

That means that the lender must, among other things, determine whether the borrower has gone into debt in order to make his or her down payment.

Down payment funds can only come from approved sources, so the lender must verify that new or undisclosed debt not from an approved down payment source (such as investments, personal savings, collateralized loans, etc) is not being used to make the down payment.

But that’s not all.

“A borrower must provide a satisfactory explanation for any significant debt that is shown on the credit report but not listed on the loan application. Written explanation is required for all inquiries shown on the credit report for the last 90 days.”

FHA loans tell the lender to do the following in such cases:

  • Verify the actual monthly payment amount of any undisclosed indebtedness.
  • Include the monthly payment amount and resubmit the loan if the liability is greater than $100 per month.
  • Determine that any funds borrowed were not/will not be used for the borrower’s cash investment in the transaction.
  • Explanation is not required for inquiries.

It’s not advisable to leave any required information off your credit application, but sometimes oversights can and do occur. An honest mistake is one thing, but FHA loan rules are designed to prevent more deliberate concealment of debt and whether that debt is being used to make a down payment beyond the scope of FHA loan regulations.

Do you have a question about FHA home loans? Ask us in the comments section.

FHA Loan Credit Standards

016When applying for an FHA home loan, many borrowers are in the dark about credit score requirements and other issues related to FICO scores in general. We recently answered a reader question about FHA loan credit requirements and now is a good time to review FHA policy on FICO scores.

The FHA requires the lender to use an available credit score to determine whether or not the borrower is eligible for an FHA home loan. The FHA has rules for interpreting or using FICO scores from credit reports. According to the FHA Frequently Asked Questions list on the official site:

“When the credit report reflects:

• 3 credit scores (one from each repository) – the middle score is used
• 2 credit scores – the lower of the two scores is used
• 1 credit score – that score is used”

It’s easy to see that borrowers who want to know if they qualify for an FHA loan should begin their journey by examining the lowest credit score on their report and working from there. But what about situations where there is more than one FHA loan applicant on the loan? According to the FHA:

“If there is more than one borrower, the lender must:

1. Determine the decision credit score for each borrower
2. Select the lower score (or lowest score if more than two borrowers).”

Again, the lower score comes into play.

In situations where the is a lack of credit or non-traditional credit, FHA loan rules have this to say:

“Borrowers with non-traditional credit (or insufficient credit) must qualify based on the guidance in Handbook 4155.1 4.C.3 If TOTAL renders an “accept/approve” risk classification, it can be relied on (subject to correct data) EXCEPT when none of the owner-occupants has a credit score. In such cases, the loan must be underwritten using the insufficient credit underwriting guidance.”

If you feel your FICO scores are too low, an FHA referred housing counselor may be able to advise you. Contact the FHA at 1-800 CALL FHA and ask for a referral to a government-approved housing counselor in your area.

Do you have questions about FHA mortgages? Ask us in the comments section.

FHA Loan Reader Questions: Credit Scores

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A reader asks, “My credit score is in the ‘poor’ range (low score 475. Hi score 585) and I will need assistance with down payment. However, I have an excellent income and have been on the job over 15 yrs. I have recently been approved for an auto loan which I am using to I prove my credit scores. Might I qualify for FHA, and what assistance is available for the down?”

The FHA has rules about minimum credit scores needed for FHA loan approval. According to the FHA official site:

“When a credit score is available, it must be used to determine eligibility for FHA insured financing. The score that is used to determine eligibility is called the ‘decision credit score’.

When the credit report reflects:
• 3 credit scores (one from each repository) – the middle score is used
• 2 credit scores – the lower of the two scores is used
• 1 credit score – that score is used”

What is the FHA standard for loan approval? For “typical” new purchase FHA loans, the following applies:

“DECISION CREDIT SCORE and LTV

Case Numbers Assigned on or after 10/04/10 , when the decision credit score is:

• 580 and above: Maximum financing
• 500-579: Maximum LTV 90.00%
• 499 and below: Not eligible for FHA insured financing”

The FHA official site adds, “A transaction where one borrower has only “nontraditional credit” and the other has a decision credit score of less than 500 would also be ineligible.” It’s very important to point out that these credit scores are FHA minimums–the lender is free to require higher credit scores that don’t necessarily match the FHA minimum guidelines printed here.

FHA loans do not feature FHA provided down payment assistance. There may be such programs available on a state or local level, but such programs would need to meet FHA guidelines in order to be eligible. Borrowers should contact the FHA directly or speak to a loan officer to learn more about the down payment requirements for FHA insured mortgages.

Do you have questions about FHA home loans? Ask us in the comments section.

FHA Loan Reader Questions: No Credit History?

019A reader asks, “I had a question about buying a home with no credit. My partner has had a very good job for over 2 years now and I am a stay at home mom. Our problem is that she has no credit it’s not bad credit it’s no credit history.”

“I, on the other hand have some credit but since I stay home that wouldn’t be sufficient. She has records of paying her bills on time and rent on time. Would we be able to qualify for a home loan with that information and no credit?”

The answer to this question is found in the FHA loan rules as published in HUD 4155.1 Chapter Four Section C, which states the following:

“The lack of a credit history, or the borrower’s decision to not use credit, may not be used as the basis for rejecting the loan application.” That is good news for anyone in the same situation as the reader. What else does the FHA loan rulebook say about non-traditional or non-existent credit history?

“Some prospective borrowers may not have an established credit history. For these borrowers, including those who do not use traditional credit, the lender must obtain a non-traditional merged credit report (NTMCR) from a credit reporting company, or develop a credit history from

• utility payment records
• rental payments
• automobile insurance payments, and
• other means of direct access from the credit provider”

Your loan officer can provide you with more details on what may be required at application time in order to verify income, payment history and other factors. But in general, the FHA does have a pathway to an FHA mortgage loan for such borrowers, provided they meet other FHA loan requirements the same as any applicant.

Do you have questions about FHA home loans? Ask us in the comments section.

HUD Settles Alabama Housing Discrimination Case

FHA DISCRIMINATION SETTLEMENT

A press release issued by the FHA and HUD announces the settlement of a housing discrimination case in Alabama. According to HUDNo.13-077, “The U.S. Department of Housing and Urban Development (HUD) announced today that LLB&B, Inc., a real estate company based in Mobile, AL, will pay $29,000 as part of a Conciliation Agreement resolving allegations that one of its agents refused to show a condominium to a prospective homebuyer because he is African American. ”

This violation of the Fair Housing Act came to light thanks only to a misdirected phone call. According to the press release, “The homebuyer alleged that he learned of the discrimination when the real estate agent inadvertently left a message on his telephone voicemail indicating her belief that white neighbors would ‘panic’ at the prospect of an African American neighbor.”

Later in the press release, “In the message, the real estate agent, referring to the white neighbors who lived near the condominium, allegedly stated, ‘Those people will panic when they see a black person drive up and look at it.’ She added: ‘I called him back. He didn’t answer so that was good! If I didn’t call him back he could sue me for prejudice.’ The man shared the recording with a HUD investigator, who then shared it with the real estate company.  Upon hearing the message, the owners of LLB&B terminated the agent’s employment.”

As the press release indicates, Fair Housing Act laws make it illegal for sellers, agents and anyone else involved in housing or real estate, “to discriminate in the sale or rental of housing based on, race, color, national origin, religion, sex, familial status, or disability.  It also prohibits refusing to show a condominium to a prospective buyer and making statements that discriminate because of race or color.”

“No one should be denied the opportunity to purchase a home because of their race,” said John Trasviña, HUD Assistant Secretary for Fair Housing and Equal Opportunity.  “The company has taken steps to resolve this matter, provide relief to the potential homebuyer and prevent a recurrence.”

The real estate company has, according to the press release, agreed to pay the prospective buyer $29,000. It will also “reaquire fair housing training for all its employees, and include the fair housing logo in all its advertising.”

We report these stories to remind borrowers that housing discrimination can and does happen–and that often those discriminated against are the only ones who can help put a stop to these illegal practices–without reporting violations of the Fair Housing Act, there can be no investigation.

Anyone who has experienced discrimination may file a complaint with the FHA/HUD–call the HUD Office of Fair Housing and Equal Opportunity at (800) 669-9777.

Remembering Our Veterans

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Memorial Day is traditionally a time to remember the sacrifices made by men and women in uniform. The writer Joseph Campbell once said, “A hero is someone who has given his or her life to something bigger than oneself.”

Our veterans, past and present, have sacrificed plenty, and it’s only fitting to pause and give thanks whether silently in private or in a public event.

Memorial Day is a time to reflect on the sacrifices made by those in uniform; this holiday is so much more than back yard barbecues, sales and a day when the banks are closed. The reason we’re able to enjoy our freedoms is due to what our people in uniform have done and continue to do. Those who have made the ultimate sacrifice for their country should be remembered always, but especially on this Memorial Day holiday.

To all our troops, past and present…thank you.

We’ll return to our usual posting schedule tomorrow.

FHA Loan Reader Questions: Buying a Home After a Short Sale

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A reader asks, “I did a short-sale last year, with total debt forgiveness and no delinquency judgement. I never missed a payment the 8 years I held the mortgage. It did not effect my credit which is currently 737.”

“The bank did however report the short sale to the credit bureau and now I’m told it will be an issue getting an FHA loan. Lender says one thing, actual FHA website says another. I’m confused and discouraged. Advice?”

The real issue here seems to be a disconnect between what the FHA loan rules say and the lender’s standards. If the FHA requires a certain minimum, but the lender has a higher standard, who is right? What standard is used to determine whether or not the loan can be approved?

FHA minimums are just that–the lender is free to require longer seasoning periods, higher credit scores, etc. As long as the higher standards are legal and are in compliance with the Fair Housing Act, the lender is free to have more strict requirements in such cases.

The FHA loan program is a voluntary one, with lenders participating in it. FHA minimum standards must be observed, but those standards cannot be held as the “make or break” baseline that the lender MUST conform to.

That’s in specific reference to minimum credit scores, seasoning requirements, etc. Local, state, and federal housing laws must be observed and the lender’s policies must apply fairly for any applicant as required by the Fair Housing Act.

In short, the lender can issue a higher standard than the FHA minimum–the financial institution is within its rights to do so. Best advice in this case is to contact the FHA for a referral to a housing counselor who may be able to advise when it comes to circumstances like these–how to become a better credit risk, rights and responsibilities, etc.

Do you have questions about FHA home loans? Ask us in the comments section.

FHA Announces Assistance For Homeowners in Oklahoma

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The FHA and HUD have announced disaster relief for victims of the recent tornado in Oklahoma. According to HUDNo.13-078, “HUD will speed federal disaster assistance to the State of Oklahoma in addition to resources being provided by Federal Emergency Management Agency (FEMA) and other federal partners.  HUD will provide support to homeowners and low-income renters forced from their homes due to tornadoes and severe storms.”

U.S. Housing and Urban Development Secretary Shaun Donovan has also reiterated current Federal Housing Administration policy, “that mortgage lenders should release insurance payments to homeowners rather than applying these funds toward outstanding mortgage debt” according to the press release.

On Tuesday May 21, 2013, the President made a federal disaster declaration for Oklahoma counties including Cleveland, Lincoln, McClain, Oklahoma and Pottawatomi. A federal declaration allows the FHA and HUD to offer foreclosure relief and other assistance to “certain families living in these counties” affected by the natural disaster.

“We will stand with Oklahomans for as long as it takes,” said Donovan. “As families begin the difficult process to recover from this devastating storm, HUD stands ready to help in any way we can.”

According to the FHA/HUD press release, “HUD will assist homeowners by:

  • Granting immediate foreclosure relief for homeowners with FHA-insured mortgages–HUD granted a 90-day moratorium on foreclosures and forbearance on foreclosures of Federal Housing Administration (FHA)-insured home mortgages;
  • Making mortgage insurance available to allow those who lost their homes to get 100% mortgage financing–HUD’s Section 203(h) program provides FHA insurance to disaster victims who have lost their homes and are facing the daunting task of rebuilding or buying another home. Borrowers from participating FHA-approved lenders are eligible for 100 percent financing, including closing costs;
  • Making insurance available for both mortgages and home rehabilitation – HUD’s Section 203(k) loan program enables those who have lost their homes to finance the purchase or refinance of a house along with its repair through a single mortgage. It also allows homeowners who have damaged houses to finance the rehabilitation of their existing single-family home”.

For more information on how to get foreclosure relief or other disaster-related assistance, contact the FHA directly by calling 1-800 CALL FHA.

Do you have questions about FHA home loans? Ask us in the comments section.

FHA Loan Reader Questions: Closing Costs

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A reader asks, “Can you have the closing costs added to your mortgage loan in California? Or do you have to pay them before escrow closes?”

Let’s see what the FHA loan rules, as described in HUD 4155.1, have to say about this. Chapter Five, Section A has a heading titled Settlement Requirements Needed To Close, which states:

“Lenders may pay a borrower’s closing costs, and/or prepaid items by ‘premium pricing.’ Closing costs paid in this manner do not need to be included as part of the seller contribution limitation. The funds derived from a premium priced mortgage

• may never be used to pay any portion of the borrower’s downpayment

• must be disclosed on the GFE and the HUD-1 Settlement Statement

• must be used to reduce the principal balance if the premium pricing agreement establishes a specific dollar amount for closing costs and prepaid expenses, with any remaining funds in excess of actual costs reverting to the borrower, and

• may not be used for payment of

− debts

− collection accounts

− escrow shortages or missed mortgage payments, or

− judgments.”

Note the line where it says that down payments can never be included in the amount of the loan–the down payment is known as a “minimum required investment”. Borrowers who cannot make a down payment will not be given an FHA loan. The down payment amount, at a minimum, is 3.5% of the loan.

Closing costs may include the down payment, broker fees, seller credits, discount points and other expenses as described in Chapter Five in HUD 4155.1.

This reader question also asks when closing costs including the down payment are due–these items must be paid at the time the loan closes. Speak to your lender about the procedures for making such payments for more information.

Do you have questions about FHA mortgages? Ask us in the comments section.

Foreclosure Avoidance: FHA Modifies Mortgage Rate Rules

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The FHA loan program requires borrowers to find a participating lender, negotiate terms, and come to an agreement on an acceptable mortgage loan interest rate.

In general, the FHA and HUD do not set or regulate mortgage rates, except to require that such rates be “reasonable and customary” for the market. But the FHA has issued new guidance for mortgage rates as they apply to home loss mitigation/foreclosure avoidance programs as described in FHA Mortgagee Letter 2013-17.

“The purpose of this Mortgagee Letter is to provide guidance for determining the interest rates to use when implementing FHA’s Loss Mitigation Home Retention options,” the document states, adding that the new policies described in ML 2013-17, “are to be implemented by mortgagees for Trial Payment Plans offered on or after July 1, 2013.”

The new mortgagee letter clarifies terms related to mortgage loan rates used for Loss Mitigation/Home Retention programs. “This Mortgagee Letter amends the definition of “Market Rate”, and supersedes where there is conflict, the policies described in Mortgagee Letters 2012-22, 2011-28, and 2009-35.”

“For purposes of this Mortgagee Letter, the term “Market Rate” is now defined as a rate that is no more than 25 basis points greater than the most recent Freddie Mac Weekly Primary Mortgage Market Survey (PMMS) Rate for 30 year fixed-rate conforming mortgages (US average), rounded to the nearest one-eighth of one percent (0.125%), as of the date a Trial Payment Plan is offered to a borrower.”

While this might seem a bit complex to the borrower, for the lender, the instructions are clear–there is a definitive, FHA-directed definition for the calculation of mortgage rates for the FHA loss mitigation programs. Why is this important? Because of the direct instructions given to FHA lenders in this area:

“The Interest Rate for a Trial Payment Plan must not be greater than the aforementioned Market Rate.” Also, there is a direct instruction to the lender for permanent modification payment plans:

“A borrower’s monthly mortgage payment including principal, interest, taxes, and insurance (PITI) under a permanent modification must not be more than the borrower’s mortgage payment, (including PITI) under the Trial Payment Plan.”

For more information on this FHA mortgagee letter, contact the FHA at 1-800 CALL FHA or contact your lender to see how this may apply to you for future needs.

Do you have a question about FHA loans? Ask us in the comments section.